72 Platinum and palladium – PGMs comfortably eclipse gold 84 Bulk commodities Energy Crude oil – Looking for Q4 09 economic recovery 111 US natural gas – Prompt prices have likely bott
Trang 1Source: Bloomberg, LME and RBS
Trade-weighted US dollar index vs the RBS Base Metal Price Index The weaker US dollar has breathed fresh life into metals
70 110 150 190 230
Sep-07 Mar-08 Sep-08 Mar-09 Sep-09
70 75 80 85 90
RBS Base Metal Price Index (lhs) US Dollar Index (rhs)
Boom, Bust, Re-adjust
“There is a tide in the affairs of men, which, taken at the flood, leads on to fortune; omitted, all the voyage of their life is bound in shallows and in miseries On such a full sea are we now afloat, and we must take the current when it serves, or lose our ventures.” Shakespeare’s Julius Caesar
Commodities from zero to hero in just nine months
Commodities have gone from investment pariah to the ’darling of the diggin’s’ in just nine months Economies exiting recession, a sharply weaker US dollar and the return of the consumer augur well for commodity prices The RBS Base Metal Price Index since its December 2008 nadir has risen 70% Precious metals have set hearts aflutter with gold recapturing the US$1,000/oz marker Other
heavyweights such as oil, iron ore, coal and natural gas are also on the move
It is now essential for real demand growth to take up the baton
We are now seeing the dismantling of the temporary bridges across the recession, which included monetary and fiscal stimulus, hefty supply cutbacks, Chinese commodity stockpiling and various ‘cash-for-clunkers’ schemes It is crucial for the delicate tendrils of real demand growth to become robust
Watch out for the price relapse before sunny uplands come into focus
The world recession is over and we forecast world GDP growth will rebound by 3.6% in 2010 Commodity prices are now likely to pause for breath after their strong rallies Price-induced reactivation and the end to Chinese stockpiling will likely temper pricing tension, but post 1H 11, markets look more robust Stay with precious metals, where platinum and palladium will likely outperform silver and gold Base metals are led by copper, lead-zinc then aluminium, with nickel least favoured Bulk commodities iron ore, thermal and coking coal and uranium are stirring from their slumbers and should not be overlooked Oil has risen, but has struggled to maintain traction; 2010 should see a firmer tone as demand returns Natural gas looks to have bottomed and faces much improved prices ahead
This material should be regarded as a
marketing communication and may have
been produced in conjunction with the RBS
trading desks that trade as principal in the
instruments mentioned herein
Trang 2Economic focus – No straight line to sustained expansion 23 Economics – China special – The euphoria will fade 32
Commodity reviews Industrial/base metals
Aluminium – Economically geared metal faces huge challenges 34 Copper – Remains our most favoured base metal 42 Nickel – Back from the abyss - but too fast too early? 51
Tin – This laggard should start catching up in 2010 70
Precious metals
Gold – Agnostics become believers – well done gold! 72
Platinum and palladium – PGMs comfortably eclipse gold 84
Bulk commodities
Energy
Crude oil – Looking for Q4 09 economic recovery 111
US natural gas – Prompt prices have likely bottomed 117
Quant analytics
Commodity & FX relationships – Currencies predict commodity prices 128
Commodity Companion appendix
Commodity indices – negative roll reduces returns 138
World’s top commodity producers and consumers 142 Global refined base & precious metal production and consumption 154
30-year real and nominal base and precious metal prices 160 Glossary of useful mining and industry websites 163
We thank our colleagues across asset classes for their invaluable contributions
to this Commodity Companion
Trang 3Aluminium (transport, packaging, construction)
Aluminium’s price recovery from the lows has been the most
muted among the base metals It may well have the
greatest upside potential from current price levels in the
longer term but we take a broadly neutral stance for 2010
Aluminium is economically geared and we expect demand
growth of 10% pa in 2010-11 But nearly half the producer
cutbacks of ~7mtpa have already been unwound and we
forecast that the market will remain in surplus in 2010
However, industry stocks are very low and we expect the
market to be tightening rapidly by 2012 We forecast that
the aluminium price will top US$3,000/t in 2013
RBS aluminium price forecasts
Current 2008 2009F 2010F 2011F 2012F 2013F LT
US¢/lb 84 117 75 90 100 115 130 110
US$/t 1,850 2,571 1,645 2,000 2,200 2,525 2,875 2,425
Source: LME, RBS forecasts
Nickel (stainless steels and alloys)
Nickel is our least preferred industrial metal It is burdened
with a big overhang of excess inventory and idled capacity,
plus a parade of new mines All this will take time to be
absorbed and we expect the nickel price to drift in 2010
However, nickel is economically highly geared and after a
sharp decline since 2006, we forecast that demand will rise
by 10% pa in 2010-13 This should tip the market into deficit
in 2012-13 and finally lead to some pricing tension
RBS nickel price forecasts
Current 2008 2009F 2010F 2011F 2012F 2013F LT
US$/lb 7.87 9.53 6.67 7.05 7.95 8.75 10.45 6.80
US$/t 17,340 21,020 14,700 15,500 17,500 19,250 23,000 15,000
Source: LME, RBS forecasts
Lead (lead-acid batteries)
Lead has been the best performer of 2009 to date, partly
due to the relative resilience of demand Production from
scrap cannot on its own meet future demand growth and
the primary sector is hampered by lead’s by-product status
We expect the lead market to return to deficit in 2011-13,
leaving it just as tight as in 2006-07 After consolidating in
2010, the lead price is forecast to reach US$2,750/t in 2013
RBS lead price forecasts
Current 2008 2009F 2010F 2011F 2012F 2013F LT
US¢/lb 103 95 77 102 109 115 125 77
US$/t 2,275 2,084 1,700 2,250 2,400 2,525 2,750 1,700
Source: LME, RBS forecasts
Copper (electrical cable, wiring and tubing)
Copper remains our most preferred base metal It may not have the greatest upside from current levels but we expect the copper price to reach a new all-time high by 2013
Copper’s demand prospects are not among the best but we believe copper producers will have the most difficulty in keeping up with growing demand We forecast an underlying market deficit by 2011 and that by 2013 it will be fast approaching pre-recession tightness
Before then, copper still has some work to do A large surplus has been disguised by Chinese stockpiling and some material may resurface, so easing the path to deficit
RBS copper price forecasts
Current 2008 2009F 2010F 2011F 2012F 2013F LT US¢/lb 278 315 230 305 330 375 410 225
US$/t 6,135 6,951 5,075 6,750 7,250 8,250 9,000 4,950
Source: LME, RBS forecasts
Zinc (galvanized steel for corrosion protection)
Zinc has been in the middle of the base metal pack in 2009 and we expect it to remain there in 2010-11 before it comes into its own in 2012-13 We forecast that zinc will grind higher next year but that it will top US$2,500/t by 2013
The zinc market has been in hefty surplus in 2009 and we expect it to stay in (smaller) surplus in 2010-11 as producer restarts offset strong demand growth But the lean pipeline
of new mine capacity points to large deficit from 2012
RBS zinc price forecasts
Current 2008 2009F 2010F 2011F 2012F 2013F LT US¢/lb 87 85 72 92 98 109 116 82
US$/t 1,910 1,870 1,585 2,025 2,150 2,400 2,550 1,800
Source: LME, RBS forecasts
Tin (solders, food/beverage tinplate cans)
Tin has had its own drama but has lagged behind in this year’s price recovery We expect it to start catching up in
2010 and forecast that tin will eventually hit US$18,000/t
Tin demand has fallen heavily since 2006 and a sizeable surplus has developed this year But we forecast that supply will barely keep up with recovering demand next year and expect growing market tightness from 2011
RBS tin price forecasts
Current 2008 2009F 2010F 2011F 2012F 2013F LT US$/lb 6.85 8.39 6.25 7.25 7.80 8.05 8.15 6.80
US$/t 15,100 18,487 13,775 16,000 17,250 17,750 18,000 15,000
Source: LME, RBS forecasts
Trang 4Gold (jewellery, investment, coins)
Gold set to average ~US$950/oz in 2009, will uniquely
among the metals, have had 8 consecutive years of higher
yoy average annual prices An enviable track record
Gold above the US$1,000/oz marker is the canary in the
mine Gold is a classic harbinger of future inflation (watch
out bonds) It has also drawn strength from the weaker US
dollar and acute investor interest despite weak jewellery
sales These should reverse as we enter the Gifting Season
Physically backed gold ETFs are now worth a record
US$55bn A new Central Bank Gold Agreement has come
into force, but even central bankers like gold, with the
CBGA2 ending with the lowest annual sales in 10 years!
RBS gold price forecasts
Current 2008 2009F 2010F 2011F 2012F 2013F LT
US$/oz 1,000 872 950 1,000 975 1,000 1,150 825
Source: LBMA, RBS forecasts
Platinum (vehicle auto catalysts, jewellery, coins)
Even after its impressive price recovery this year, we expect
platinum to trend much higher through 2010-13, outshining
gold and eventually returning towards US$2,000/oz
Industrial and jewellery demand should recover strongly in
2010-11 We forecast that platinum producers will struggle
to keep pace, and buoyant physical investment demand
may lead to real market tightness in the years ahead
RBS platinum price forecasts
Current 2008 2009F 2010F 2011F 2012F 2013F LT
US$/oz 1,285 1,572 1,200 1,450 1,550 1,600 1,800 1,400
Source: LBMA, RBS forecasts
Coal (power generation, steel production)
Annual contract metallurgical coal prices for 2009/10
slumped by about 60%, but the market has already
tightened since on strong Chinese steel production Indian
demand should be supportive too and we forecast a 17%
recovery in hard coking coal price contracts for 2010/11
Thermal coal remains a buyer’s market However, we
expect Indonesian exports to decline and Indian imports to
rise in the coming years, necessitating more investment in
Australian capacity With costs proving sticky, we forecast
modestly higher thermal coal prices in 2010 and beyond
RBS coal price forecasts
Source: TEX, Platt’s, RBS forecast
Silver (photography, jewellery, investment)
In traditional fundamental terms, silver remains, in our view, the weakest of the precious metals Yet its price recovery has been amongst the strongest Silver is a geared play on gold and investor appetite has been voracious
Photography is likely to continue to decline and jewellery demand is sensitive to price Against this, scrap supply is forecast to decline and mine output to stagnate, but we expect underlying supply surplus to persist
However, physical investment, chiefly through the ETFs, has shown itself amply able to hoover up the surpluses We see
no reason why this should not continue, given the outlook for gold Silver is forecast to trend up towards US$20/oz
RBS silver price forecasts
Current 2008 2009F 2010F 2011F 2012F 2013F LT US$/oz 16.40 14.99 14.50 17.50 16.00 16.75 19.00 13.00
Source: LBMA, RBS forecasts
Palladium (auto catalysts, jewellery, electronics)
We believe palladium has the most upside potential of all exchange-traded metals and forecast that the price will more than double in the next four years to US$700/oz plus
Even with soaring scrap supply, rebounding industrial demand will keep the palladium market in large underlying deficit Robust physical investment may further tighten the market and crucial Russian state sales will eventually end
RBS palladium price forecasts
Current 2008 2009F 2010F 2011F 2012F 2013F LT US$/oz 290 351 250 350 400 475 650 400
Source: LBMA, RBS forecasts
Iron ore (raw material for steel production)
We have raised our forecast of the long-term iron ore price For fines we have raised it by fully 33% With China, not Japan, now the price setter, marginal costs in China must
be taken into account as well as the incentive price for Australian and Brazilian production
In the shorter term we still forecast a modest recovery in annual contract iron ore prices for 2010/11 despite the recent decline in spot prices We expect a marginal under-utilisation of iron ore production capacity in the next few years but cutbacks in China should limit any surplus
RBS iron ore price forecasts
US¢/dltu 2008 2009F 2010F 2011F 2012F 2013F LT Fines 147 99 108 117 105 94 86
Trang 5Crude oil (transport, petrochemicals)
The sharp contraction in global petroleum demand seen in
late 2008 and into 2009 led to the rapid build up of crude oil
and distillates inventories around the world
Despite little recovery in real demand for petroleum
products and near record levels of crude and distillate
inventories, crude prices have rallied from their lows YTD
crude oil has traded more in line with equity and currency
markets than the intrinsic supply/demand balance of crude
Short term, oil markets need to see global distillate
inventories begin to draw down for WTI to trade significantly
above $80/bbl Longer term we expect the upturn in the
business cycle drive a recovery in real demand that will
push prices back towards $100/bbl by 2013
RBS crude oil price forecasts
Source: Bloomberg, RBS Sempra forecasts
US natural gas (heating, power generation)
We do not believe US production will exceed total storage
so as to cause an inventory glut in October The prompt US
gas price has likely bottomed, but heavy inventories will
keep prices depressed until the onset of cold winter.
The US year over year inventory surplus will slowly be
worked off over the course of this coming winter, supporting
prices in 2010. However, a bull market in US natural gas is
unlikely to develop in the near term without signs of a larger
than expected decline in domestic production.
Longer term we expect to see the prompt US natgas price
back towards $7/MMBtu The Baker Hughes US rig count
remains at heavily depressed levels As a result, when gas
demand picks up the supply response may be delayed
This should underpin stronger prices in the longer term
RBS US natural gas price forecast – prompt
NYMEX/Henry Hub
$/MMBtu Current 2008 2009F 2010F 2011F 2012F 2013F
H-Hub 4.80 8.90 4.25 6.25 6.50 6.75 7.00
% yoy 25% -52% 47% 4% 4% 4%
Source: Bloomberg, RBS Sempra forecasts
Uranium (power generation)
A steady stream of new reactors coming on line in the coming years, predominantly in Russia and China, will support stable uranium demand growth
Supply of US-Russian HEU (highly enriched uranium) is due
to end in 2013 Forecast increases in mine production will not offset the exit of US-Russian HEU; as a result we expect the uranium market to move into deficit by 2014
We believe the days of sub-US$20/lb uranium are history New mine operating costs are US$20-30/lb; this will provide
a firm floor to the uranium price We forecast that the uranium price will peak in late 2011 at US$95/lb as the market tightens ahead of the expiry of the US-Russian HEU down blending programme in 2013
RBS spot uranium price forecasts
Trang 6Precious
Palladium US$/oz 293 375 28% 700 139% Platinum US$/oz 1,289 1,500 16% 1,900 47% Silver US$/oz 16.39 17.50 7% 20.00 22% Gold US$/oz 997 1,000 0% 1,200 20%
Oil & Gas
H-Hub Natgas US$/MMBtu 3.46 6.50 88% 7.00 102%
Brent Crude Oil US$/bbl 68 82 21% 100 47%
Source: Bloomberg, RBS forecasts
Source: RBS
1-year preferences - Forecasts move from Sept 09
average spot prices to RBS Q4 10F average forecasts
Commodity positioning
The table below shows our commodity preferences over two time frames The first is a year ahead We have taken the average spot price in September 2009 and compared it with our price forecast averages for the final quarter of 2010
On this analysis we are from current levels most bullish on natural gas (+88%), palladium (+28%), oil (+21%) and platinum (+16%) Our least favoured are nickel (-8%); gold (n/c) and lead (2%)
However, the rankings change if we view current prices in relation to our H2
2013 expectations for deep inventory-draining deficits to have emerged, the world economy to be fully back into its stride and commodities in general to be in effervescent mood Our top picks on a four-year view are palladium (+139%), natural gas (102%), aluminium (64%) and copper (53%)
Trang 7Source: LME and RBS
RBS Base Metal Price Index at its highest level in 12 months and up 70%
from its December ’08 low V-shaped recovery is fact, not conjecture
0 50 100 150 200 250 300 350
“There is a tide in the affairs of men, Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life is bound in shallows and in miseries
On such a full sea are we now afloat, And we must take the current when it serves, or lose our ventures.”
Shakespeare’s Julius Caesar
The tide has turned for commodities
What a difference a few months make! Commodities have gone from investment pariah to the ’darling of the diggin’s’ in a matter of just nine months Yes, commodity fund attention and a helpfully weaker US dollar have played their part, but so too have the four key bridges across the recession that we spoke
about in our previous Commodity Companion, “Bridge over troubled water”
A crucial phase has now been reached, with the baton passing from a financially driven risk rally to the expected 2010 upturn in the world business cycle In effect, commodities have reached a junction at which the initial stimulus features are on the wane and economic growth translates into real consumer demand As yet, it is very early days Forward-looking economic and financial indicators have
certainly aligned; now to get the follow-through into genuine consumer offtake
This year for commodities has been like a wedding at which everyone is showered with confetti All have shared the joy Industrial, precious metals and oil have all seen sharp rebounds from their price lows, even though their markets have remained in fairly forlorn shape Top of the pops in terms of price
performance have been lead, copper and zinc We saw a substantial reversal of fortune for lead, the worst performing metal of 2008 and thus far the best of
2009 Precious metals, notably palladium and silver, have also had an excellent year, with gold setting the heather afire by not only breaking back above the US$1,000/oz marker, but enjoying its longest-ever run of 10 consecutive days in which it traded above US$1,000/oz Despite this strong run, gold – the best performing metal in 2008 – is thus far up 14% and the worst performing of 2009
It’s no longer a matter of
conjecture, but fact that for base
and precious metals 2009 has
seen a V-shaped recovery
The monthly average RBS Base
Metal Price Index enters the final
quarter at a 12-month high,
recapturing nearly half its losses
Trang 8Source: ICE and RBS
Brent oil has recaptured 29% of the losses since its July 2008 peak
148
36
68
0 25 50 75 100 125 150 175
High Low Current
Source: LME and RBS
Copper has recaptured 54% of the
losses since its July 2008 peak
High Low Current
Source: LBMA and RBS
Gold has recaptured 91% of its losses since its March 2008 peak
1,033
682
1,000
0 250 500 750 1000 1250
High Low Current
Source: LME and RBS
Overlapped chart of the RBS Base Metal Price Index progression in months from the cycle lows of 1975, 1982 and 2008 Strong fit – relapse ahead?
90 110 130 150 170 190 210
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Months following cycle low (forecasts in red) Dec-1975 Nov-1982 Dec-2008
We are here Recovery began Dec '08 Now 9 months into the recovery, up 70%
and eclipising the two previous recoveries We forecast a supply reactivation induced pause in our index before better times return
Dec '75 index peaked after 7 months, up 30% then had a second peak 8 months later before relapsing for 11 months
Nov '82 recovery peaked after 9 months, up 42% and then relapsed for 27 months before the next bull market
Many commodity prices are already halfway back to their peak levels
History warns us to expect a relapse in commodity prices
Base metals prices across the board have had an excellent 2009, but let us not forget that commodity markets have not yet reached equilibrium There are still massive supply surpluses and huge inventory mountains to be eroded We must not be fooled into thinking that the price gains we have seen are a natural precursor to even better prices ahead That would be nice, but let us introduce some prudence into our strategic thinking
History can be a useful guide to the future The chart below shows the monthly progression of the RBS Base Metal Price Index from its lows in the two previous oil–shock-inspired declines of the mid-1970s and the early 1980s First, all three price cycles bottomed towards the end of the year – the final capitulation and perhaps clearing of the decks before the new year began Despite the worldwide economic crisis, the recovery in base metal prices as represented by the RBS Index has been eerily similar to the two previous examples The rally of 1975
peaked after seven months, up 30%, then began a meandering relapse The rally of 1982 peaked after nine months, up 42%, then relapsed for 27 months
This cycle bottomed in December, has tracked the previous recoveries and
outpaced them in rising 70%, but at nine months also seems to be running out
of momentum The common themes here are the fear of price-induced production reactivation and the handing over of the baton, from hope that
springs eternal to the reality of the cycle Batons are easily dropped!
This economic recession has
been the worst since 1945, but we
have had a telescoped
commodity cycle – peak to
trough in nine months against an
average of 41 months for
previous price recessions, and
trough halfway back to peak
levels in just nine months
Trang 9Reuters/Jefferies CRB commodity index vs the trade-
weighted US dollar Index
RJ CRB Spot Index DXY Index (rhs)
Source: Bloomberg, RBS
Reuters/Jefferies CRB index vs the S&P 500 VIX volatility Index
250 300 350 400 450 500
Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09
0 16 32 48 64 80
RJ CRB Spot Index VIX Index (rhs)
Risk appetite and US dollar risk to commodity attitude
Not only do we have the price gains running out of upside momentum, but we also must consider two other potential headwinds The first is the path of the US dollar Commodities are priced in US dollars, so as a rule, the weaker the US dollar, the better it is for purchasers of commodities in stronger currencies such
as euro or yen The trade-weighted US dollar begins Q4 09 at 12-month lows
The left-hand chart shows the broad-based Reuters/Jefferies CRB commodity index against the trade-weighted US dollar and shows an antithetic relationship
If you think the US dollar will strengthen, commodities are a sell
The right-hand chart shows a measure of investor appetite for risk, the S&P 500 volatility or VIX index As the chart shows, until mid-2008, the RJ/CRB index was able to cruise higher, with the VIX index range trading and showing no signs of what was about to befall markets As the financial crisis erupted, the VIX ballooned to record levels and the market-sold risk and commodities were prime candidates for selling This year has seen the VIX index subside towards levels associated with pre-Lehman days, and commodities have rebounded as investors have been happy to take on board the risk trade
Job done for the temporary bridges across the recession – now the unwind and dismantling
In our April Commodity Companion, we identified four bridges across this
recession that would provide temporary solace to the commodity sector while it waited for the genuine recovery in world demand Each of these has been successful and all are now being unwound As a reminder, we identified:
Bridge 1: Global monetary and fiscal stimulus, zero interest rate policies and quantitative easing Rates are now on hold and some central banks have
begun raising rates Unwind of QE and rescue packages under way
Bridge 2: Massive supply cutbacks Reactivation is now beginning, notably in
aluminium, but all the other metals have shown fraying at the edges There is a strong yin/yang between price-induced reactivation and demand-induced reactivation Our preference is for the latter
Trang 10Source: LME, LBMA, Reuters and RBS
Percentage rise in commodity prices from their cycle
lows Impressive gains show worst is behind us
Source: LME, LBMA, Reuters and RBS
Percentage declines from price cycle peaks Gold has fallen the least, natural gas and nickel the most
Bridge 3: Chinese stockpiling Has been substantial in 2009, but the past two
months have shown significant reduction in commodity imports into China across the commodity spectrum Copper imports in August were down 25% mom and 43% lower than their record high of 0.373mt in June 2009 Our view is that Chinese stockpiling was in part to sterilise some of its US$2.12trn of US dollar reserves, but also, access to raw materials must not be an impediment to Chinese growth This is why China is also seeking ownership of commodities If company equity ownership is blocked, then China will seek access to operating projects
Bridge 4: ‘Cash-for-clunkers’ Schemes were put in place by various
governments and auto registrations have soared Germany and the US have now closed their schemes; others, such as the UK (which has just been extended), are close to reaching funding limits The market does fret that the schemes have merely brought forward purchases and that auto sales will swoon in 2010
Keep an eye on important headwinds yet to come
Other factors may come into play during 2010, to provide stronger headwinds to the commodity complex These include: 1) higher taxes around the world to help pay for the financial crisis; 2) the spectre of a long-term unemployed burden with still rising unemployment numbers; 3) reduced leverage by financial institutions; 4) massive cuts in government capital spending programmes; 5) rising world interest rates; and 6) the removal in the US of real estate housing tax credits
There may then arise later in H1 2010 a sense that ’is this really as good as it gets?’ Déjà vu plays its part and trend growth slumps lower, as for example in OECD Industrial Production post the 1974 and 1981 oil shocks
Commodity price winners and losers
The two charts below provide insight into investor attitudes towards the commodity suite The chart on the right shows the percentage price declines from commodity cycle price peaks Note that the top 2 commodities are precious metals Investors are hanging onto precious metal exposure as a hedge against future inflation and as a play on US dollar weakness Natural gas and nickel were two of the biggest price boomers caught up in the fund euphoria and remain furthest from their price peaks We believe the chart on the left should offer comfort Many of the commodities bottomed in Q4 08 and for those seeking evidence of price stabilisation and a turning point, these impressive increases from their lows should provide comfort that the worst is well and truly over
Watch out for a number of
economic and financial
headwinds that have yet to come
into play
Trang 11Source: Company releases and RBS
Producer cutbacks and restarts as a percentage of 2008 world output – restarts are mounting, stark and worrying differences between the metals
Nickel (mine) Aluminium Zinc (smelter) Zinc (mine) * Lead (refinery) Lead (mine) * Copper (smelter) Copper (mine)
Cutbacks still in place Restarts * Excludes China
Forget cutbacks; production restarts have begun
The flood of producer cutbacks in the base metal industry in Q4 08 and Q1 09 slowed to a mere rivulet in Q2 09 as price stabilisation hardened into recovery Moreover, there were just a handful of further cutbacks in the third quarter, outnumbered by announcements of restarts as prices continued to firm Even in the second quarter China, which had been in the forefront of the cutbacks, was quietly and not so quietly reactivating capacity across most base metal industries, and it was joined in Q3 by several producers elsewhere
We see some potentially worrying aspects to recent developments In the first
place, restarts have been induced more by price than by demand Chinese
stockpiling, which by its nature may be only temporary, played a significant behind-the-scenes role in triggering reactivation within China, and globally, there were still only tentative signs of a pick-up in genuine base metal demand
Second, the restarts paradoxically have been heavily concentrated in one of the most oversupplied markets, aluminium Third, there remains a huge overhang of closed nickel capacity Ironically, few of the admittedly modest cutbacks in the fundamentally strongest market, copper mining, have yet been reversed
Our chart below shows estimates of the capacity cutback since mid-2008 and the reactivation of that capacity, both expressed as a percentage of 2008 world production Although our figures do not capture big, hard-to-monitor cutbacks and restarts in the Chinese lead/zinc mining industry, aluminium really stands out We estimate that the proportion of previously closed aluminium smelter capacity (over 7mtpa at its peak) that has now restarted is fast approaching 50% In aluminium, both cutbacks and restarts have been dominated by China Our estimates probably do not capture all the mines feeding the Chinese nickel pig iron industry, but the chart shows that there remains a huge overhang of idled nickel mine capacity worldwide, representing c20% of 2008 world output
With the exception of copper and perhaps lead, we would urge producers to
be very cautious about embarking on price-induced as opposed to
demand-induced reactivation For some metals, notably aluminium and nickel, this would risk derailing the impressive recovery seen this year
Producer cutbacks have ended
and reactivation is now the
theme; nickel and aluminium saw
the biggest cuts as a percentage
of world output
We prefer demand-induced
reactivation, but some producers
will not wait and will implement
more risky price-induced
reactivation
Trang 12RBS long-term metal prices raised
We provide two sets of commodity prices, medium term through to 2013 reflecting our market supply-demand balance outlooks These forecasts are subject to frequent revision reflecting changes in the global economic environment and the dynamics of supply and demand The second set of longer-term prices are those which we expect to prevail over, say, a 10-year time horizon Our longer-term real forecasts move less frequently We try to provide
a ballpark price required to bring on new capacity We have looked at industry cost curves and made an assessment of the currency impact of a weaker US dollar and a more robust inflation profile post 2013 on our long-term prices
As a rule, long-term prices have tended to decrease over time Since the 1960s, real prices have tended to decline by around 2% pa Economies of scale developed as bigger mines and processing facilities were built, technological advances were made and a shift of production to lower-cost labour areas occurred, as well as the type of operation In copper, an underground sulphide operation will likely have higher costs than an open pit sulphide or a heap leach oxide operation In the case of nickel ferro – nickel laterite ores are notoriously more expensive than sulphide ores to process But production costs have been
on the increase Factors have included increased cost of environmental compliance and land rehabilitation; water and air pollutant capture; energy;
wages, health care and pension benefits; and adverse currency movements
RBS checklist for commodity recovery
On the next page we have updated our Commodity Checklist to Recovery of signs needed before we reach the next boom for commodities Lots more ticks are now in the boxes There is not one Messianic chart or indicator The recovery
is a process, so we have divided our list into financial, economic and commodity market drivers and arranged them in roughly chronological order, but please view it as a guide to events that may occur as markets work their way through this maelstrom
The strengthening of commodity
currencies such as the rand,
Canadian dollar and Australian
dollar has pushed up production
costs; inflation, too, could
become an issue
RBS long-term price forecasts – these have mostly been raised as production coats have risen reflecting such
factors as adverse currency movements on the weaker US dollar, inflation expectations, and wage and power
Current Previous Change (unit) Change %
Source: RBS forecasts
Trang 13Resumption of more normal lending a priority and a pre-requisite for a business cycle recovery 9
S&P VIX index falls back from its extreme levels (peaked at 90) to more normal levels below 30 9Cross-asset class selling pressure ends and funds begin to register steady positive fund inflows as risk appetite returns 9Key central bank interest rates begin to rise as headline and then core inflation data starts to increase
Economic signals
Key economy IP/GDP data series turn positive Technical recession has ended in the US, Japan, Germany, France, the UK, Sweden and Brazil 9Automobile sales begin to recover (spurred by the various ‘cash-for-clunkers’ incentive schemes) 9Baltic Dry/Capesize Freight indices make demonstrable rises as ships begin to move cargo as international trade improves
US payroll numbers finally begin to consistently improve and unemployment starts to decline
Commodity market signals
Economic recession causes commodity to demand collapse Declines yoy are toe-curlingly harrowing 9Reported inventories rise alarmingly and stock:consumption ratios rise well away from critical/comfort levels 9Commodity prices slump well below marginal costs of production Un-crowded bottom cycle trade based upon value and accumulation 9
Commodity price stabilisation as cutbacks bite, supply surplus contained and funds start value investing in earnest 9Precious metals gold, silver, platinum and palladium advance ahead of industrial and bulk commodity prices 9Industrial metal prices step up smartly, leaving deep lows well behind as the recovery phase of the pricing cycle occurs 9
Oil price recovers, spurred by OPEC constraint, and hopes that world business cycle upturn will stimulate energy usage 9
Exchange inventories finally begin to erode to feed consumer re-stocking and nascent demand
Period of onerous supply surpluses ends and market surpluses diminish and begin to switch from surplus to deficit
Capacity reactivation in full swing, both price and demand induced Capex spending on the rise Bubble charts of new projects reappear
Hiatus in price progression (relapse) while market awaits confirmation that price recovery is not a false dawn
Business cycle really gets into its stride and world interest rates begin to rise to combat rising headline and core inflation
Commodity markets bathed in above-trend genuine commodity demand growth
Stock: consumption ratios fall to critical levels as inventory-draining supply shortfalls occur, spurring prices even higher
Momentum buyers arrive in full force, drinking from the horn of plenty Backwardations and market squeezes reappear
Bearish analysts are rarer than hen’s teeth and those that survive are like Victorian children: seen but not heard
End-cycle bull market takes off Super-cyclists return Words like ‘paradigm shift’ appear again and miners declare special dividends
Don’t forget to book your ticket to the Bahamas!
Source: RBS
Trang 14Source: IMF, LME and RBS economic forecasts
World GDP growth and the RBS Base Metal Price Index in real terms Worst recession in living memory, but metals already in the sunny uplands
-1 0 1 2 3 4 5 6 7
World GDP growth RBS - Base Metal Price Index (real)
RBS world GDP growth forecast of +3.6% yoy for 2010
In the ‘Economic Focus’ section of this report, the RBS economists offer their thinking on the world macroeconomic outlook The good news is that since our
April report, countries have been lining up to declare themselves as now out
of technical recession Europe’s two largest economies, Germany and France,
set the ball rolling with Japan, the US, Sweden, the UK and Brazil all declaring their recessions over Our enthusiasm towards the commodity sector derives much support from our expectation that world GDP growth in 2010 will rebound
to 3.6% with risks to the upside Base effect will of course flatter
The chart below shows the RBS Base Metal Price Index and world GDP growth
It shows how the final fanfare in commodity prices usually comes towards the end of a period of sustained economic growth Note also the powerful increases
in metal prices in the period immediately following recession years History has
repeated itself History also shows that prices tend now to relapse
Hallelujah, the world recession is
over; economies are already
clawing their way out of the
abyssal depths; we forecast
world GDP growth of 3.6% yoy in
2010, with risks to the upside
RBS macroeconomic forecast summary, 2008-10F Worldwide recessions are ending World GDP growth in 2010 should rebound to at least 3.6%
% change yoy 2008 2009F 2010F Real GDP
Trang 15Source: LME and RBS
Total LME warehouse inventory is at record levels of 5.72mt – and is dominated by aluminium Total inventory worth over a record US$14bn
0 1,000 2,000 3,000 4,000 5,000 6,000
Aluminium is 81% of total LME
inventory and copper just 6%
But by value, aluminium is 60%
with copper 15% (US$bn)
LME inventories still at record highs
Total LME warehouse inventories at 5.72mt have now exceeded the previous record high of 4.77mt seen at the end of April 1993 Industry destocking and collapsing consumption have enabled the LME to live up to its mantra of being the market of last resort Warehouse inventory is now valued at over US$14bn
The good news is that the pace of inventory accretion is slowing Indeed,
September saw the lowest level of inventory build in 17 months
Metal held in LME-registered warehouses is dominated by aluminium holdings Aluminium accounts for 81% of the inventory tonnage, zinc 8% and copper 6%
In terms of inventory value, aluminium is 60%, copper 15% and nickel 14%
Base metal refined production and consumption should rise in 2010F
Base metal refined production and consumption will contract across the board in
2009, with aluminium showing the worst demand fall, down 7.5% yoy and stainless steel the biggest production slump down 12% For much of the commodity boom, we had price- and demand-induced capacity expansion and price-induced demand destruction The phase of price-induced production cuts and the concept of idling swing capacity are also coming to an end The game now is about reactivation and first mover advantage We forecast that all metals will show yoy production expansion in 2010, with nickel and stainless steel showing the greatest rises This should be but the first year of significant production additions from reactivated as well as new and expanded operations
Contraction in world supply and
demand in 2009; shared pain,
shared gain as producers rapidly
implemented closures; watch out
now for across-the-board
reactivation
Base metal annual yoy refined metal production growth, 2006-13F (%)
2006 2007 2008 2009F 2010F 2011F 2012F 2013F Aluminium 5.9% 12.4% 5.3% -6.6% 4.0% 8.3% 6.5% 6.7%
Copper 4.3% 3.9% 0.9% -3.8% 3.2% 4.2% 4.0% 4.0%
Nickel 5.1% 6.3% -3.5% -7.5% 9.0% 6.5% 9.0% 6.5% Stainless steel 14.4% -1.0% -6.0% -12.0% 10.0% 9.0% 14.0% 8.0% Zinc 4.6% 7.3% 2.3% -7.0% 4.6% 6.6% 3.3% 3.2%
Lead 3.5% 2.5% 6.0% -4.1% 4.2% 4.7% 4.2% 4.8%
Source: CRU, RBS forecasts
Trang 16We also envisage a strong measure of consumer and distributor restocking in
2010, which will flatter the yoy numbers as well as a base effect phenomenon
The declines in 2009 were every bit as bad as the 1980-82 post-oil-shock recession
All the base metals markets in supply surplus in 2008-09
The following tables provide summaries of our implied supply/demand market balances through to 2013F and the derived stock consumption ratios We highlight periods of supply deficit in bold The world supply deficits of 2006 were progressively replaced in 2007-09 by supply surpluses We can’t even begin to think what state the industry would be in had aggressive cutbacks not been made We forecast that 2011 will be a transition year to the better, with supply surpluses diminishing and shortfalls reappearing By 2012, all the metals should
be in price-supporting supply deficit
The table below shows total industry inventories expressed in terms of weeks of consumption The stock ratio rose sharply in 2008, notably for aluminium and nickel, the two more economically geared metals, and we forecast that the stock ratios will peak by the end of 2010 Based on our demand forecasts for 2010, in the case of aluminium, one week of stock equates to 0.665mt, for copper 0.340mt, for zinc 0.215mt and nickel 0.025mt
Base metal annual yoy world consumption growth, 2006-13F (%)
2006 2007 2008 2009F 2010F 2011F 2012F 2013F Aluminium 8.0% 10.0% -1.2% -7.5% 10.0% 10.0% 8.0% 7.0%
Copper 3.2% 3.8% -1.7% -6.0% 7.0% 6.0% 4.2% 3.8% Nickel 12.0% -4.5% -5.0% -3.0% 10.0% 8.0% 13.5% 8.0% Zinc 5.2% 2.0% -0.5% -6.3% 7.1% 6.7% 5.8% 4.3% Lead 4.1% 1.5% 2.7% -2.7% 4.9% 5.2% 4.7% 4.5%
Source: CRU and RBS forecasts
Hefty supply surpluses in
2008-10, but 2011 should see transition
towards the first supply deficits,
notably copper and lead; by 2012
all markets should be in deficit
Implied world base metal supply/demand balances, 2006-13F Markets have migrated from supply deficits in 2006 to supply surpluses
2006 2007 2008 2009F 2010F 2011F 2012F 2013F Aluminium -620 150 2650 2850 850 300 -250 -500
Copper -120 -110 360 750 150 -150 -200 -200 Nickel -60 90 105 45 35 15 -45 -75
Zinc -390 145 460 350 100 100 -200 -350 Lead -160 -85 175 50 0 -50 -100 -75
Source: CRU and RBS forecasts
Base metal market stock consumption ratios, 2006-13F (weeks of stock)
These have rapidly moved from below critical levels to above comfortable
2006 2007 2008 2009F 2010F 2011F 2012F 2013F Aluminium 4.0 3.8 6.3 10.0 9.5 8.5 7.5 6.5
Trang 17Source: Bloomberg and RBS
Gains in our commodity suite since end 2008 in US
dollars have been eye-catching
Source: Bloomberg and RBS
… but in stronger South African rand the gains are lower and indeed some gains have turned to losses
Iron Ore Gold Aluminium Platinum Brent Oil Tin Silver Nickel Palladium Zinc Copper Lead
Weaker US dollar currency impact has been dramatic
The world has now moved away from a strong US dollar environment Indeed, the trade-weighted US dollar begins Q4 09 at its lowest level in over 12 months The two charts below show the impact of the weaker US dollar on a suite of spot commodity prices We have chosen the South African rand as our example, but
a similar though less extreme picture emerges for the Canadian and Australian dollars
The charts show that the percentage gains in commodity prices when translated into local currency terms are dramatically lower South African miners with costs
in appreciating rand (not to mention higher wage settlements and Eskom power tariffs) but product revenues in weaker US dollars face a tough margin squeeze
The value and accumulation trade now completed
In 2008, with the exception of gold, every one of the key traded commodities experienced significant price declines of 30-60% By year-end, commodities had fallen so far and so deep into industry cost curves that they offered financial funds a bargain basement entry opportunity Philanthropy is not a feature of the mining industry and by and large, miners are not going to produce at a loss for too long That said, there has been an element of shared-pain, shared-gain about this cycle
Given the often extreme price volatility and daily moves of above 5% for a metal are not uncommon, entry into the commodity space in Q4 08 was very much for
the brave hearted and it was all about executing the bottom of the cycle trade
This tends not to be a crowded trade, but one where given the oversold nature of
commodities; longer-term investors are attracted by value and the opportunity
to accumulate exposure Those who this year have followed the risk trade rather
than the economic trade have been handsomely rewarded
Commodity markets are now entering the twilight zone, where the baton has to
be handed over from hope and anticipation to genuine economic demand pull
as the business cycle recovers It becomes more and more a macroeconomic trade as the business cycle moves into recovery and expansion This is about
momentum and value stretch and will become a much more crowded trade.
Risks remain, such as a relapse
in the pace and magnitude of the
economic recovery; that
producers prematurely reactivate
too much idled capacity; the
ending of Chinese SRB buying
and even perhaps stockpile
selling, prompts a sell-off
Trang 18Expansion: Growth turns positive and the momentum remains positive
Slowdown: Growth remains positive and the momentum turns negative
Recession: Growth turns negative and the momentum remains negative
Direction of the Business Cycle
4
We are now in the recovery phase of the business cycle
As we said earlier, for commodity markets, 2009 has all been about recovery in prices from dismally low levels, levels that were deep into industry cost curves and in which huge swathes of the industry were losing money By definition,
economic commodity production must be that which can be extracted/produced at a profit (some state-owned enterprises seem to operate for quota and have a subtle shift along the lines of merely that which can be extracted) It has been about recession in key developed world economies and
temporary bridges to stimulate growth, not very much about the macroeconomic
environment This is now changing It is now all about the macro
So where are we in the business cycle? The two diagrams below are from the
RBS Business Cycle Screener published by our colleagues in European
Economics Commodity markets have – correctly in our opinion – this year been discounting that the world business cycle is moving from Recession Red Phase
3 into Recovery - Red Phase 4 As shown in our explanatory boxes below, Phase
4 is when growth remains in negative territory but momentum turns positive
Crucially, although the phases of this cycle have been pretty much textbook, the speed at which the slowdown and recession phases have completed their
moves has been staggeringly swift In our January Commodity Companion,
“Metamorphosis”, we noted that historically, base metal prices as represented
by the RBS Base Metal Price Index have taken 41 months to move from peak to
trough This time around, that journey was achieved in just nine months from March to December 2008 – a telescoped cycle But look at the symmetry
It has also taken just nine months for our index to rise 70%, recapturing half its losses Meanwhile, governments around the world are declaring their recessions (as defined as two consecutive quarters of negative GDP growth) over
Trang 19Source: IMF, LME, RBS forecasts
Metals have experienced a telescoped price cycle and have had their very own V-shaped recovery Time now to pause for breath before greater glory
0 50 100 150 200 250 300 350
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10F 12F
RBS Real Base Metal Price Index RBS Nominal Base Metal Price Index
London Metal Exchange Week 12 October − coming into focus
It’s that time of year again for the annual LME Week, kicking off what is known affectionately in the metals world as the “mating season” LME Week this year begins on Columbus Day, Monday 12 October, and will see thousands of commodity producers, consumers, traders, analysts and media descend on London for a week-long festival of metal markets and their outlooks It provides
an opportunity for crystal ball gazing into 2010 It will be held in a much better price and financial environment to that of October 2008, when the world was already sliding into the depths of the recession With just three months of the year remaining, 2009 should go down as a banner year for commodities, a year
in which gold spent its longest period above the US$1,000/oz marker and a year
in which many of the world’s key commodities – oil, copper, lead and nickel – doubled in price during the worst recession in living memory
The chart below shows the RBS Base Metal Price Index in real and nominal terms and our forecast (in red) for the index The message is that base metals have had their very own V-shaped price recovery We forecast that in common with previous price cycle recoveries, which relapsed after 7-9 months, commodities in general are likely to pause for breath while the fundamentals catch up with the business cycle recovery It will be crucial for real demand in western developed world economies to flourish and compensate for the ending
of temporary stimulus packages and Chinese stockpiling The path of the US dollar, attitudes to risk appetite and the macroeconomic outlook are now the three key common denominators for the commodity complex
If our forecasts are fulfilled, then commodity prices of base and precious metals through to bulks and energy appear set to enjoy handsome gains through to
2013 We forecast the RBS Base Metal Price Index will track essentially sideways and rise around 17% in US dollar terms by Q2 11 as producer reactivation delivers hundreds of thousands of tonnes of commodities into world markets
This phase will coincide with fears of economic growth relapse and with a number of financial and economic headwinds such as higher taxes, hefty cuts in government capital spending programmes and of course rising interest rates Beginning in H2 11, we expect commodity markets to get truly into their stride Supply deficits should re-emerge; inventories should be drawn down; capacity utilisation rates should rise to high levels; freight rates should rise sharply and all the ingredients should then be in place for a good old-fashioned bull market We forecast a 35% rise in the RBS Base Metal Index from H1 11 to H2 13, providing
an overall rise in our index from current to end-2013 of an impressive 60%
Trang 20Coal - Hard coking US$/tonne 305 128 150 150 145 145 100
Coal - Semi soft coking US$/tonne 240 79 84 87 92 84 74
Coal - LV PCI US$/tonne 245 86 98 98 90 90 80
Coal - Thermal US$/tonne 125 69 75 78 80 83 65
Oil & Natural Gas
WTI Crude Oil US$/bbl 99.75 62 78 85 90 100 100
Brent Crude Oil US$/bbl 98.52 63 79 87 92 102 102
Henry Hub Natural gas US$/MMBtu 8.90 4.25 6.25 6.50 6.75 7.00 7.00
Annual yoy percentage changes in actual and RBS commodity price forecasts, 2008-13F
2008A 2009F 2010F 2011F 2012F 2013F Base metals
Coal - Hard coking 211% -58% 17% 0% -3% 0%
Coal - Semi soft coking 281% -67% 6% 4% 5% -8%
Coal - LV PCI 263% -65% 14% 0% -8% 0%
Oil & Natural Gas
Henry Hub Natural gas 25% -52% 47% 4% 4% 4%
Source: LME, LBMA, LPPM, TEX, NYMEX, RBS forecasts
Trang 21WTI Crude Oil US$/bbl 43 60 68 75 62 75 75 80 80 78
Brent Crude Oil US$/bbl 46 60 69 77 63 77 77 82 82 79
Aluminium US¢/lb 65 85 90 90 95 105 110 120 125 135
US$/t 1,424 1,865 2,000 2,000 2,100 2,300 2,425 2,625 2,750 3,000 Copper US¢/lb 185 278 308 308 320 340 365 385 385 430
US$/t 4,055 6,095 6,750 6,750 7,000 7,500 8,000 8,500 8,500 9,500 Lead US¢/lb 60 94 105 100 107 111 111 118 120 125
US$/t 1,332 2,075 2,300 2,200 2,350 2,450 2,450 2,600 2,700 2,800 Zinc US¢/lb 60 84 92 92 95 100 107 111 115 120
US$/t 1,324 1,841 2,025 2,025 2,100 2,200 2,350 2,450 2,500 2,600 Nickel US$/lb 5.30 8.03 7.15 6.90 7.50 8.40 8.40 9.05 10.00 10.90
US$/t 11,721 17,679 15,750 15,250 16,500 18,500 18,500 20,000 22,000 24,000 Tin US$/lb 5.55 6.93 7.25 7.25 7.70 7.95 7.95 8.15 8.30 8.05
Trang 22Changes in RBS commodity price forecasts since our April 2009
Commodity Companion - Bridge over troubled water
2009F 2010F 2011F 2012F LT Base metals
Coal - Hard coking 0% 15% 11% 12% 16%
Coal - Semi soft coking 1% 3% 2% 2% 18%
Coal - LV PCI 0% 11% 5% 0% 14%
Coal - Thermal 0% 7% 3% 0% 18%
WTI Crude Oil 37% 41% 13% 20% 33%
Brent Crude Oil 35% 41% 14% 20% 34%
Henry Hub Natural gas 0% 4% n/a n/a 8%
Source: RBS forecasts
Trang 23No straight line to sustained expansion
Q3 09 back to expansion: Q3 GDP reports and the earnings season is still a month away but the evidence available to date suggest that G7 GDP will be up around 2.5% q/q annualised This would follow deepest and longest post war
contraction of close to 6% on average over the previous 3 quarters Q3 G7 GDP
is now forecast to be a little stronger than was the case a month ago, as the upside risks we had highlighted in Europe have materialised
However, in light of the contraction experienced, this would still be a relative modest expansion, leaving G7 output close to 4% lower than a year ago With the global economy having successfully returned to positive growth in Q3, the focus remains squarely on its ability to sustain any expansion into next year
Importantly, we expect the economic news flow to become more mixed over Q4,
a development which will no doubt leave the debate about the shape of the recovery wide open
Fears of double dip to regain traction momentarily: Our view that the
probability of double dip is low remains unchanged At the same, we recognise that the path to sustainable recovery is unlikely to be a straight line The first important test to that view will come in the coming weeks as we expect a temporary slowdown in the pace of expansion in G7 output in Q4 This forecast
is largely based on the idea that part of the expansion in Q3, especially in the
US, was borrowed from Q4/Q1 A temporary contraction in US consumer spending in Q4 – which remains our base case scenario – will likely be the most significant bad news to digest for the market as this will no doubt revive fears of
a double dip
The end of the “cash for clunkers” and of the homebuyer tax credit (expiring on November 30 th ) are the main culprits behind this moderation in growth in Q4 Europe also appears to be exposed in the short term to the
phasing out of the car scrappage incentive schemes which is expected to dampen euro area GDP in Q4 relative to Q3
Road to sustainable recovery unlikely to be a straight line: Navigating
through what we believe is going to be a much more mixed batch of economic data will not be easy In that context, labour market developments will become the most relevant gauge to assess how sustainable the recovery will be The key signposts are in the US, a bottoming out of the contraction in payrolls over Q4 and in Europe a further slow down in the pace of increase in unemployment
Should labour market developments depart significantly from our expectation,
we would be forced to reassess our forecast for H1
Trang 24China 1.47 4.77 5.9 -0.9 2.0 Euro area 2.18 2.13 3.3 0.3 1.1
Policy rate - end year, %
US 5.25 4.25 0.14 0.15 3.00 Japan 0.25 0.50 0.10 0.10 0.10 Euro Area 3.50 4.00 2.50 1.00 1.00
Key commodity currency - FX forecasts – end period
Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1-11 Q2-11 Rates per US dollar
AUD* 0.86 0.89 0.86 0.84 0.82 0.80 0.78 0.78 CAD 1.08 1.02 1.00 1.05 0.99 0.98 1.02 1.04 ZAR 7.60 8.00 9.00 9.00 8.70 8.60 8.60 8.60 CLP 553 540 550 580 550 500 490 490
CNY 6.83 6.80 6.70 6.60 6.50 6.40 6.30 6.20 INR 48.6 43.0 44.0 45.0 45.0 46.0 47.0 48.0 RUB 30.7 36.0 37.0 36.0 35.0 35.0 34.0 34.0 TRY 1.50 1.55 1.65 1.57 1.55 1.53 1.62 1.67 JPY 91 91 89 90 93 96 99 102 GBP* 1.67 1.66 1.62 1.63 1.68 1.71 1.62 1.62
Rates per euro
USD 1.46 1.48 1.42 1.40 1.38 1.35 1.28 1.26 JPY 133 135 126 126 128 130 127 129 GBP 0.87 0.89 0.88 0.86 0.82 0.79 0.79 0.78
Source: RBS forecasts
* Currency at head column per currency at end row
Source: IMF, RBS forecasts
RBS world GDP growth forecast %
change yoy Rebound on its way
Source: Bloomberg, RBS forecasts
Federal funds target rate %
Trang 25There are instances when the economy is especially difficult to forecast, most notably around turning points The present situation is particularly tricky, even for
a turning point, for a variety of reasons This recession has been the longest and most severe since the 1930s, and has included a major financial sector crisis that has not been entirely resolved Thus, at this stage, there are very few appropriate precedents to fall back on, especially since the only two recessions
in the past 25 years were both extraordinarily shallow and short, followed by extended periods of halting, sub-par growth
One distinction that is absolutely critical is the difference between levels and changes This sounds simple enough, but judging from the discussions in the markets over the past few months, it has proven quite difficult This distinction is most critical when coming out of a recession, especially a deep one, since the level of activity is low (disastrously so in the current episode) and will remain so for quite some time no matter how fast the economy recovers It may seem paradoxical to some, but the lower the level of activity, the more vigorously growth can (and should) rebound to bring the economy back toward equilibrium Indeed, this idea is embodied in the so-called Zarnowitz rule (named after Victor Zarnowitz): deep recessions are almost always followed by rapid rebounds
The Zarnowitz rule amounts to empirical support for a V-shaped recovery, but there is widespread skepticism that the economy will be able to generate momentum, even from the current depressed levels of activity Indeed, even our relatively optimistic forecast falls well short of a full-fledged V-shaped recovery (in the 1970s and 1980s, recessions that were severe but less so than the latest one were followed by bursts of around 6% real growth in the first year of recovery) Still, we believe that at least some of the pessimism currently being exhibited regarding the forthcoming recovery reflects confusion between levels and changes In particular, because the focus is almost always on changes (we typically think about output in terms of GDP growth, about prices in terms of inflation, and employment in terms of the change in payroll jobs), many ideas these days are being applied to changes that more appropriately should be thought about in level terms
Two concepts may help to clarify the distinction
1 Activity will be depressed for a long time but growth can be explosive
Having contracted by about 4% over the past 18 months, the economy stands at incredibly low levels of activity, as illustrated by an unemployment rate nearing 10% and a capacity utilisation rate below 70%
Indeed, in a variety of sectors, the level of activity swooned to an unsustainably depressed level in early 2009, as businesses and households were paralysed by uncertainty amid a financial and economic crisis The best example is residential construction, but a similar story can be told to varying degrees for other sectors, such as auto sales and business investment in equipment and software
Changes in production (ie output) tend to be even more volatile than demand coming out of a deep recession due to the inventory cycle In the early stages of
a recession, firms tend to be caught flat-footed, and they do not adjust output downward fast enough to keep up with weakening sales At some point in the cycle, businesses slash production to a level that is even lower than the depressed pace of sales (eg the automakers in the spring)
Stephen Stanley
Chief US Economist
stephen.stanley@rbs.com
+1 203 897 2818
Trang 262 ‘New normal’ and potential growth rates A related misconception is that
growth must be tepid due to the headwinds facing the economy (rising savings rates, tight credit, etc) Debate has been lively about whether the potential/trend growth rate of the economy will be noticeably lower than before, but the problem
is that many market participants are applying a lower trend rate of growth (the change argument) to the current low level of activity
Inevitably, a recession takes the level of activity below the long-term trend In severe recessions, output tends to fall well below trend A variety of observers has suggested that the recovery will be sluggish because trend growth will be slower than before The problem is that many look for growth to settle into this sluggish pattern right away
The problem with this view is that it skips the recovery phase of the cycle,
leaving the level of activity permanently depressed relative to trend History clearly shows that following deep recessions, there has always been a period of above-trend growth that helps speed the economy along back to equilibrium (ie trend) This was true even in the Great Depression in the US and during the 1990s in Japan In the wake of the most severe recession since World War II, this necessitates a substantial rebound at some point To be sure, there can be legitimate debate about the timing and pattern of a recovery (ie whether it will be shaped like a V, a U, or even a W), but there will be a strong recovery period
One can plausibly argue that the potential rate of GDP growth will be noticeably lower going forward than it was before We are sceptical of this view, believing the long-term trend growth rate should be determined predominantly by the pace of advances in productivity and the labour force, neither of which should
be affected much by the sorts of negative forces cited as headwinds
Nevertheless, even if the potential growth rate is lower going forward, the economy is still currently operating far below its potential and will need to see a substantial initial burst in the process of getting back to its trend level
Third-quarter GDP update
Since late August, RBS’s Q3 real GDP forecast has improved somewhat Our headline growth estimate has inched up from a 2.5% annualised pace to around 2.8%, but this has occurred even as we project bigger drags from inventories and trade than we were previously assuming Real consumer spending may advance somewhat faster in Q3 than previously thought, but the bigger story over the past month has been the upgrades in the housing and capital equipment sectors
These categories of GDP both posted contractions of close to 40% annualised in Q1 (-39.2% and -43.6%, respectively), but based on surprisingly robust monthly data, now seem poised to move into positive territory in Q3 In addition, beyond the current period, we have nudged up our growth forecasts for Q4 and most of
2010 Our estimates still are nowhere near a full-fledged V-shaped recovery (at least as we would define it), but the string of stronger-than-expected economic releases over the last few months has underscored our conviction that the economy will expand at a well-above-trend pace in 2010
Trang 27The relative country performance over the quarter is likely to show Germany growing most since March 2008 (we forecast +1% q/q) followed by France (+0.4% q/q) Countries such as Italy and Spain are still expected to perform poorly moving from contraction in Q2 to about stagnation in Q3 According to our
new GDP indicator (see On track for Q3 growth | RBS GDP Tracker: euro area),
the improvement should come mostly from an increase in manufacturing output
of about 1.5% q/q, the first increase since Q1 2008
End of car scrappage schemes unlikely to jeopardise recovery
The outlook for Q4 09 is positive with industrial production likely to be yet again the prime driver The key short term uncertainty is related to the end of the vehicle scrappage programmes in some euro area countries and in particular in Germany Euro area car sales were up about 12% in Q2 q/q (4.5% y/y) and will likely be slightly positive in Q3 Some softening in car sales in Q4 is quite likely although it is unlikely that they will fall off a cliff Indeed, a number of countries have already stated that they will try and smooth the phasing out of these pragmatic incentive schemes
To date, France has already said that its programme will continue into 2011 to avoid any major collapse in car sales whilst the UK has extended its scheme to embrace a further 100,000 vehicles Meanwhile, Italy is said to be readying an extension of its scrapping plan which was launched in May if there were signs of plunging sales at the end of the year when the programme is due to elapse
In Spain, the government programme to subsidise new purchases was implemented in May and seems to have started having a positive impact only in September (with industry reports suggesting a rise in car sales of about 10%
y/y) The programme was designed to run for a year or up to a budget of 100 million At the end of September, about 40% of the funds had been used suggesting no imminent need to increase the programme
So the key uncertainty comes from Germany Its scrappage scheme which was the first to be implemented in the euro area expired earlier this month The programme is said to have boosted car sales by 2 million unit However, although the subsidy is now closed, the government is allowing delayed deliveries under the scheme through into 2010
Labour market is turning
The euro area labour market turned at the end of Q1 when unemployment rose
by 1.3 million, the largest increase since the 1992 recession Since then the pace
of increase in joblessness has been declining steadily In the 3 months to July, euro area unemployment rose by 500k almost a third of the increase in Q1
The euro area labour market adjustment has been most unusual with for example, 60 % of the increase in euro area unemployment since the beginning
of 2008 entirely explained by the end of short term contracts in the Spanish construction and manufacturing sectors! On the other extreme, the German labour market has seen one of the smallest deteriorations across the region despite the fact that the German economy is experiencing one of the largest contractions in output in the euro area This very unusual development is related
to the short time allowance programme which currently has around 1.2 million
Jacques Cailloux
Chief European Economist
jacques.cailloux@rbs.com
+ 44 207 085 4757
Trang 28as labour costs remain high and demand remains weak Indeed, the programme has been extended for the second time to 2011 and there are early signs that firms are actually scaling back their restructuring plans This suggests that the unemployment rate in Germany is unlikely to rise by as much as people fear At the same time hours worked will have first to rise very significantly before any meaningful hiring can take place This is true in particular for the manufacturing sector but less the case in the services sector
A turning point in the labour market at this time of the recovery suggests that the chances of double dip remain low
ECB rhetoric to gradually shift to a more hawkish stance
We have been arguing since the ECB September meeting that the rhetoric of the ECB will not get any more dovish from here We remain of that view At this stage, the Council has spoken with one voice claiming that the recovery remains unsustainable
In the coming months, this rhetoric is likely to evolve with the usual more hawkish members likely to depart from the consensus In particular, we expect the Bundesbank to strike a more positive note about the recovery as soon as the hard data in Germany supports this view In that respect, the key event risks are the August German industrial production (Oct 8th, RBS +4% m/m) and German (November 13th, RBS: +1% q/q) A reassessment of the German labour market situation by the Bundesbank is also in the offing Indeed, Bundesbank Weber stated recently that he expected the unemployment rate to rise well into 2011
Hawks to remain in the minority for some time
A more hawkish Bundesbank will not be sufficient to turn the tide and convince the whole council that the time to reign in some of the stimulus has come
Indeed, we believe that the Council will need more evidence that the recovery is indeed sustainable This probably includes the publication of both Q3 and Q4 GDP which brings us to March as the earliest for the Council to feel comfortable
to talk about sustainable recovery
At that time though, a number of other considerations will likely prevent the Bank from becoming overly aggressive:
(i) the ECB inflation projection at the time will still likely be below its comfort zone for both 2010 and 2011 The wage dynamics around the euro area will be very subdued, with the IG Metall negotiations at the end of Q1 likely to come on the low side;
(ii) Monetary and credit developments will likely be in negative territory on a y/y basis by the end of Q1, a development which should keep the monetarist on the cautious side; and
(iii) the ECB will still be wary of past policy mistakes (notably those of 1936 in the
US and 1996 in Japan) when policy accommodation was removed too early
Trang 29Japan’s Q2 GDP was unexpectedly revised down from +3.7% qoq annualised to +2.3%, due to a reduction in private inventory and corporate capex However, this is not necessarily negative for the near-term economic outlook – the downgrade in corporate inventory signals a recovery in factory production at the early stages of an economic recovery Significant downside risks to the economy remain, from domestic as well as external demand, but we expect continued positive growth on weakening of inventory liquidation and on government support We revised our GDP forecast for 2009 down, from -5.5% to -5.8%, and for 2010 from +1.2% to +0.9% given the downward revision of GDP and the government’s decision to suspend part of supplementary budget for FY09
On the price front, July nationwide core CPI fell to -2.2% yoy vs -1.7% yoy in June primarily due to a base effect from last year, a widening negative output gap, estimated to be -7.8% in Q2 this year and the yen’s appreciation against the US dollar The negative output gap and the yen’s appreciation are highly likely to weigh on underlying trend of core CPI even after the base effect disappears Given the recent yen appreciation and the government’s decision to abolish the gasoline tax from April 2010, we revised our core CPI forecast for
2010 down from -1.2% yoy to -1.4% yoy
Policy outlook
A lot of attention is being garnered for the next action of the new administration, but it seems the Bank of Japan (BoJ) has enough time on its side to assess the impact of monetary policies that it implemented from late last year In
September’s policy meeting, the BoJ slightly raised its economic assessment, but kept stressing the downside risks of the economy and the risk of deflation In terms of credit easing policy, such as outright purchase of CP and limitless collateralised lending (so called ‘monster operation’), the bank did not mention whether its discussed extending those measures again from the current year-end to the end of March next year or beyond However, it is too early to judge the step as normalisation of accommodative policy Given the still-tight funding conditions – especially in SMEs – and mounting deflationary pressure, the bank may extend those measures again by the end of this fiscal year After the regime change in the government administration, we think the new government will eventually push the BoJ to buy more JGBs so that the administration can fulfil additional economic stimulus packages for the coming years funded by JGB issuance
How the government and the BoJ will react to the yen’s appreciation is another important issue When the USD/JPY trades below 90 yen, we think the Japanese authorities likely will turn cautious in allowing further appreciation, which would cause a decline in corporate profit and deflationary pressure At the moment, the DPJ-led new government appears unmotivated to intervene in the currency because it aims to promote a more consumer-driven economy In fact, Minister
of Finance Hirohisa Fujii said that ‘the merit of the yen’s appreciation is significant for a domestic demand-driven economy’….’we should not intervene in the market except in times of emergency.’ But, we think its policy may change when expectations about a regime shift subside and yen-appreciation risks to the economy come to the fore
Junko Nishioka
Chief Japan Economist
junko.nishioka@rbs.com
+81 3 6266 3589
Trang 30Underpinnings to near-term Asian growth have strengthened considerably and risks to forthcoming data are to the upside The main indicators that support our view are:
1) inventory replenishment, particularly in the electronics sector;
2) high headroom for fiscal expansion; and
3) ongoing recovery in asset prices
Recovering growth momentum and easy global liquidity conditions provide a favourable backdrop for sustaining asset price expansion in the region
We briefly discuss these indicators The potential scale of inventory replenishment is evident from the relative ratio of new orders to inventory subcomponents in the US manufacturing ISM Equally, the semiconductor equipment book-to-bill ratio has moved up to above 1, consistent with rising demand for electronics exports Electronics are Asia’s dominant export product Finally, we also note that ytd fiscal deficit levels fall short of projected targets mainly due to delays in public spending Considering that fiscal stimulus programmes are intended to run through 2010, they could provide critical support in the event of a relapse in global demand
Inflationary pressures in the region are still tame Food prices are the only form of inflationary pressure at this stage Broader inflationary pressures are absent, reflecting a combination of still large output gaps and currency appreciation The more serious policy issue at this stage is asset price inflation and property prices
in particular Property prices have started to turn around almost across the region and are gradually becoming a policy issue Our best guess is that policymakers will first opt for regulatory measures and subsequently withdraw liquidity Conventional tightening in the form of higher policy rates is likely to be the last option
The rebuilding of FX reserves has continued apace over the past month as global liquidity is finding its way into the region; external reserves have been rebuilt to 2008 peak levels in most countries The laggards are Korea, India and Malaysia but even in these countries, reserve accumulation is progressing at a rapid pace We believe that central banks in the region will continue to rebuild external reserves, but would also become increasingly tolerant of FX
Trang 31What’s become apparent since the our forecast update is that bearish views on the US dollar have become entrenched We previously asserted that "fiscal stimulus, pent-up demand, and inventory rebuilding should maintain growth momentum into year-end” These views have now become the market consensus The idea that risk will turn US dollar-supportive by the end of 2009 looks a minimum of a quarter too early; meanwhile, the market can digest upside European growth surprises and negative year-end US dollar seasonals One additional negative US dollar surprise has been a slight shift in rate spreads against the US dollar, despite the move away from QE
We see year-end EUR/USD at 1.48; however, before year-end US infrastructure spending should kick in (less than 20% of allocated funds have been spent at the time of writing), and for a short time fiscal policies will become a relative US dollar boon and not a burden, as it temporarily adds to relative US growth The
US dollar will also play some role in reallocating growth and is another reason we’re hanging on to a view of fading relative euro strength toward 1.50
Although the G5 cycles have been synchronised and the fiscal boost may support some relative US growth acceleration, this is not shaping up into a traditional pattern of first into, first out of recession On the contrary, this is more
of a first in, last out (most of the G5); last in, first out (emerging Asia and commodity-based countries) cycle In the G10 world, those who pushed to the limits of the zero bound and pursued various forms of unorthodox policy should
be the last to tighten In contrast, those with the smallest output gaps are inclined
to see their central banks first out of the gate – Australia and Norway this year and the rest some time in H2:10 at the very earliest This represents the most important point of differentiation in the G10 world The Australian dollar already looks fully valued, but could extend to a little shy of 0.90 vs the US dollar
But what is the best funding currency? The US dollar stands out for its liquidity and is the current favourite The euro, however, is a better long-term choice, we believe, given it is overvalued against the US dollar, sterling and Scandinavian currencies, based on our short and long-term models And if the euro is preferred why not use the Swiss franc as a funder, keeping the SNB on your side? A notable absentee among funders is the yen, which is caught in an array
of inseparable factors, including incentivised dividend repatriation and DPJ policy uncertainties Level heads should prevail in the new government, protecting USD/JPY’s downside, well ahead of the 1yr straddle breakeven (currently 83.8)
Sterling should remain crucially short of carry over the next six months amid concerns about the sustainability of the upswing in UK surveys This will dominate already stretched long-term valuations and sterling could remain unloved for the majority of the year But, as the prospects for the US dollar haven’t brightened as we’d expected, our year-end forecast stand at 1.66
The biggest challenge to our view that the US dollar will underperform the rest of this year is from expectations for US interest rates If the market starts pricing in earlier Federal Reserve interest rate hikes, this would be taken as a positive for the US dollar Conversely, the biggest challenge to our view that the euro’s value
is already stretched would come with a deterioration in the US external accounts However, we find it more likely the US export sector will continue to outperform its euro-area counterpart, providing the valuation-based real economy foundation, for a turn in EUR/USD
Alan Ruskin
Head of Currency Strategy
alan.ruskin@rbs.com
+1 203 897 6402
Trang 32The euphoria over a V-shaped recovery should grow in 2H 09 Year-ago changes in the monthly economic data should rise sharply regardless of the underlying trend – economic activity collapsed this time last year, providing a low base of comparison against which to measure this year’s activity Industrial production, for instance, is forecast to reach near 20% yoy in the final months of the year Electricity production may rise at even more notable rates
The rapid narrowing of deflation should also appear to confirm the strengthening
of economic activity Food prices have started rising on a month-ago basis The rate of decline in rental prices is also slowing following stabilisation in the housing market Certainly manufacturing overcapacity could exert downward pressure on core-consumer goods prices But food prices are the largest and most volatile driver of the CPI Inflation may return as early as 4Q
There is already discussion among academics about the need to tighten monetary policy The PBOC and banking regulators have used a combination of verbal warnings and regulatory changes to slow credit growth from its surging 1H pace The State Council ultimately decides monetary policy, and it has yet to signal a change in the policy stance But the market is likely to shortly start pricing in a rising 1-year lending rate, the policy rate
However, I maintain my bearish view on the outlook Restocking played an important role in the 1H recovery The composition of growth also remains imbalanced and overly reliant on public and residential investment I thus
forecast 2010 GDP at 8%, unchanged from this year’s forecast I expect my
more bearish view will gain traction in 1H10 as the monthly data starts to record slower year-ago growth rates on unfavourable base effects and the scope of the structural challenges becomes more evident
The lack of economic reform is central to this view In the late 1990s, the government faced similarly large challenges as GDP growth slowed to below 7% Fiscal stimulus was the initial response to the crisis But it was later followed
by a series of “big-bang” reforms, including liberalisation of the housing sector, state-owned enterprise reform and entry to the World Trade Organization It was the later series of economic reforms, not fiscal stimulus, that produced the impressive growth rates of the past decade
The government has not introduced a single “big-bang” reform in the currency period And there is a chance that it has failed to appreciate the risks of a long retrenchment in global consumption If so, the economy remains dangerously reliant on public and residential investment
I expect private business investment will remain weak in 2010, plagued by overcapacity and a dearth of new investment opportunities The lack of quarterly expenditure-based GDP makes it difficult to observe such spending However, the National Development and Reform Commission, the country’s state planner, recently proposed measures to spur private business investment, while the US dollar value of exports is still 25% below its peaks, implying significant overcapacity in the light manufacturing sector
Ben Simpfendorfer
Chief China Economist
ben.simpfendorfer@rbs.com
+852 2966 2531
Trang 33government monopolies
A failure to reform raises the risks to medium-term growth prospects However, the implications for commodities demand are less bearish than they are for the overall economy I expect that the government will respond to any downside growth surprises by spurring spending on public infrastructure and residential property Spending in these two sectors is largely responsible for the rapid acceleration in the nominal monthly fixed investment data to above 30% yoy in 1H
It is popular to talk about “bridges to nowhere” But China’s GDP per capita, on a PPP-basis, is ranked 99 in the world, and the rural areas still lack basic water and electricity services and a target for new spending (Indeed, the latter is an obstacle to subsidies aimed at spurring rural consumption of household electrical goods) There will be instances of waste and overcapacity, but we believe the government has the capacity to sustain public investment spending for a number of years even if this fails to resolve economic imbalances
Trang 34Aluminium – hopes springs eternal
as price rises 60% from its low
Sep-07 Sep-08 Sep-09
Three month aluminium US$/tonne
Aluminium Economically geared metal faces huge challenges
If you like investing in underdogs, then aluminium is for you! The light metal will need all the escapology skills of Houdini to prevail against the formidable challenges ahead Aluminium has been our least preferred industrial metal and indeed thus far its price, rising only 26% since end-2008, has been the worst performing of the base metal suite Aluminium’s broad spread of consumer end uses means that it is particularly economically geared The traumatised transport and construction sectors, for example, account for about 50% of total world aluminium consumption Aluminium demand, down 7.5% in 2009, will be the worst of the industrial metals The flip side is that we expect demand growth to comfortably outstrip the other metals (bar nickel) in 2010-12
There is no cloak and dagger mystery about aluminium’s issues Exchange inventories are at record highs of nearly 5mt, with total reported inventory forecast to end-2009 at record levels of 6.50mt equivalent to nearly 10 weeks of consumption Alas, Chinese aluminium producers have been busy reactivating supply, with China’s annualised output up a substantial 31% in just five months, with over 3mtpa of restarts and new capacity coming onstream
However, we forecast world GDP rising by at least 3.6% yoy in 2010, translating, with a consumer restocking episode, into two consecutive years of inventory eroding 10% pa aluminium demand growth Note, too, that producer inventories are at record lows The key remains for western producers not to follow China in prematurely reactivating capacity, especially with so much reliance upon the business cycle recovery We are near term neutral, post-2011 bullish
RBS world aluminium supply/demand outlook to 2013F; 5 years of surplus to erode – demand needs to be robust
(m tonnes) 2006 2007 2008 2009F 2010F 2011F 2012F 2013F World primary aluminium production 33.90 38.12 40.15 37.50 39.00 42.25 45.00 48.00 Change (%) 5.9% 12.4% 5.3% -6.6% 4.0% 8.3% 6.5% 6.7%
Total Asia (includes China & Middle East) 13.08 16.57 17.92 17.75 20.00 23.00 25.75 29.50 Change % 17% 27% 8% -1% 13% 15% 12% 15%
of which China 9.32 12.57 13.70 12.75 14.50 16.00 18.00 20.50 Change % 19% 35% 9% -7% 14% 10% 13% 14% Europe (Including Russia) 8.87 9.22 9.76 8.00 7.50 7.45 7.75 8.25
of which North America 5.33 5.64 5.78 4.75 4.90 5.25 5.45 5.60
World refined aluminium consumption 34.52 37.97 37.50 34.65 38.15 41.95 45.25 48.50 Change (%) 8.0% 10.0% -1.2% -7.5% 10.0% 10.0% 8.0% 7.0%
of which Asia 16.30 19.80 20.28 19.80 22.25 24.80 27.00 29.50 Change % 13% 21% 2% -2% 12% 11% 9% 9%
of which China 8.75 12.07 12.60 13.25 14.75 16.50 18.25 20.00 Change (%) 22% 38% 4% 5% 11% 12% 11% 10%
of which North America 7.20 6.50 6.10 5.15 5.60 6.15 6.50 7.00 Change % n/c -10% -6% -16% 9% 10% 6% 8%
of which Europe 8.90 9.40 8.80 7.20 7.50 8.00 8.50 9.00
Implied market balance -0.62 0.15 2.65 2.85 0.85 0.30 -0.25 -0.50
Actual reported stock 2.67 2.80 4.53 6.50 7.00 6.85 6.50 6.00
Stock: consumption ratio (weeks) 4.0 3.8 6.3 9.7 9.5 8.5 7.5 6.5 LME spot aluminium price (US$/tonne) 2,565 2,640 2,570 1,645 2,000 2,200 2,525 2,875 LME spot aluminium price (US¢/lb) 116 120 117 75 90 100 115 130
Source: CRU, IAI, WBMS, LME and RBS forecasts
Trang 35Packaging 18%
Construction
20%
Other
34%
Source: Bloomberg and RBS
Total US auto sales hit 17-year lows in Jan’09, but rose
to 15-month highs (units of vehicle sales)
US auto sales - monthly 12 mth moving average
Source: ACEA and RBS
Percentage change in monthly EU passenger car registrations (% ch yoy)
Demand – looks set for robust rebound in 2010-11F
World aluminium consumption has just endured two consecutive years of contraction, during which time offtake has fallen by 9%, equivalent to 3.32mt of metal lost to the recession Aluminium is used in a broad range of end-use sectors embracing transport, construction, packaging, electrical and consumer durables, hence aluminium consumption is economically geared and the dismal macroeconomic environment has taken a heavy toll upon aluminium
consumption But so too the reverse Historically, aluminium (along with nickel) has been a metal showing potent demand growth in upswings of the world economy This potency will derive from real consumption growth augmented by consumer and distributor restocking Our long-run trend growth forecast for world aluminium demand is 4% pa, but for the above reasons, we forecast that the next two years will enjoy well above trend 10% pa increases
‘Cash-for-clunkers’ schemes – mission accomplished
Aluminium’s use in vehicles arises from properties such as its weight-saving advantages over steel Aluminium has a range of applications such as engine blocks, alloy wheels and vehicle space frames One of the key areas for renewed aluminium demand growth should arise from the very successful governmental cash-for-clunkers subsidy schemes These have reversed the substantial production cuts made by many of the world’s key automobile manufacturers For example, so successful was the US clunkers scheme that barely a month after it was introduced, the scheme was closed for fear of breaching the US$3bn ceiling allocated by Congress Industry estimates suggest that nearly 700,000 new sales were generated by the US scheme The chart below shows the astonishing rebound in US auto sales, which in August at 1.261m units was the strongest in
15 months and up over 90% from the January 2009 nadir
This most pragmatic of consumer stimulus schemes began in Europe, led by Germany The right-hand chart above shows data from the European Automobile Manufacturers’ Association (ACEA) for the European Union Contraction in EU passenger car sales has come to an emergency halt and they have now rebounded to post three consecutive months of net increase with registrations at 16-month highs Yes, we are concerned that the scrappage schemes have merely brought forward future sales and 2010 may see a relapse when the schemes expire However, we note that such has been the success of the schemes that some EU countries are showing signs of supporting the schemes
Trang 36Source: CRU and RBS
Yoy change in world aluminium
Source: RBS, Motor Associations
Chinese auto sales vs US light
vehicle sales; catching up (000)
China’s share of world aluminium
demand has risen from 4% to 38%
World aluminium market share in 1990 (%)
World aluminium market share in 2008 (%)
into 2010 with Germany allowing delayed deliveries under its scheme into 2010 Whatever the ethics of scrapping perfectly functional vehicles, the net effect will
be to reduce the average age of the vehicle fleet; replacing vehicles with poor emission levels with more fuel-efficient, lower emission vehicles and with better safety features One other feature is that many of the new vehicles being purchased are smaller than those scrapped
In Germany, the €5bn scheme (now ended) that began in February offered
€2,500 for vehicles more than 9 years old Over 600,000 new car registrations and 1m applications have been received Other EU countries, such as France, Italy, Spain and the UK, have adopted similar schemes The UK scheme, which began in May and was set to last until February 2010, provides a £2,000 incentive split equally between the government and the motor manufacturer This scheme has just been extended to embrace a further 100,000 vehicles having been close to reaching its funding limit Scrappage has also been a roaring success in China which introduced its own incentives and the China Association
of Automobile Manufacturers reported that passenger auto sales were up 90%
yoy in August, with a total of 858,300 passenger cars sold vs 451,400 in August
2008 As our sidebar chart shows, at one stage Chinese vehicle sales overtook those of the US, prior to the US scrappage scheme stimulus
Watch for rebound in demand from dismal lows as business cycle recovers
World aluminium consumption in 2008-09 underwent a significant growth dislocation, not unlike that seen after the two oil shocks of the mid-1970s and early 1980s Between 2001 and 2007, world aluminium demand increased at a CAGR 8% pa, double the 4% pa growth rate of the second half of the 1990s The key reason for this above-trend growth was the boost that aluminium demand received from rapidly growing Chinese consumption, which averaged a CAGR of 23% pa over 2001-07 But 2007 proved to be a watershed for aluminium
demand Growth of 10% yoy took world demand to a record 37.97mt, with China slotting in a headline-grabbing 38% The 2008 year saw world demand contract 1.2% and we forecast an additional contraction of nearly 8% in 2009, to 34.65mt
We view 2010 as a year in which most of the key consuming regions will claw their way out of the abyss Evidence is already gathering US housing starts and auto production on the rise; we see exciting data from China on auto sales but also on rising floor space under construction, all part of the Chinese urbanisation and industrialisation theme The key point here is the shift in the rural population towards the cities In 1990, around 28% of the population lived in cities against a current level of around 45% This has meant rising incomes and aluminium consumption per capita in China remains on a rising curve We note that China has been a significant importer of aluminium and products in 2009 via its state-sponsored stockpiling initiative at both the provincial and state level – eg Henan Province buying 0.500mt of metal and SRB stockpiling 0.590mt
Our economists forecast that world GDP will soon be on a sharply rising trajectory and increase by 3.6% in 2010 We expect this to have dramatic implications for world aluminium offtake, which we forecast will increase by more than double that growth rate to 10% in 2010 and in 2011 Typically, as consumer confidence returns, low-ticket item purchases such as white goods
(dishwashers, washing machines, freezers etc.) recover first Off a low 2009 base of 34.65mt, we forecast that world aluminium demand, augmented by consumer restocking, will rise by 3.50mt in 2010 to 38.15mt and a further 3.80mt
in 2011 Growth will likely moderate thereafter, but between end-2009 and 2013,
we forecast world aluminium demand will rise by 13.85mt a CAGR of 8.8% pa
Trang 37Source: IAI and WBMS
Key producer % share of ’08 world
aluminium output – China 34%
Russia
11%
Others 35%
China 34%
Rebound in Chinese output drives
up world aluminium output (mt)
World output (lhs) China (rhs)
Supply – China presses reactivation button
The world’s aluminium producers are emerging from one of the worst operating environments in living memory Prices that peaked at a record high in July 2008
of US$3,320/tonne (US$1.50/lb) inspired an attitude among producers of “we’ve never had it so good” By mid-February 2009, spot metal troughed down over 60% at US$1,288/tonne (US$0.58/lb), the lowest price since November 2001 in nominal terms and in real terms the lowest ever The industry was
haemorrhaging cash and we estimate that more than 50% of the world’s aluminium producers were losing money on a cash cost basis and about 75% on
a full cost basis Hence the massive cutbacks that at their peak totalled c7mt, or 18% of world supply
Low prices and slumping demand induced production cutbacks that have conspired in 2009 to drive down world primary aluminium output by an estimated 6.6% to 37.50mt – reduction of 2.65mt yoy But it is very much a mixed picture; one camp has a strategy of optimising output, the other of maximising production
On one hand, European and North American aluminium output is on course to contract by 18% apiece (not helped by the 0.250mt loss at UC Rusal as a result
of the Sayano-Shushenskaya hydro-electric dam disaster) On the other hand, China has already embarked upon rapid capacity reactivation and
commissioning of new smelters
Chinese reactivations lift output rate to 15-month high
The International Aluminium Institute (IAI) has reported that its members, including China, produced 23.43mt of metal in January-August, 10% or 2.62mt less than the comparable 2008 period The issue, though, is that world output has already embarked upon an upward trajectory and this is before we have any clarity that real demand growth is here to stay
Aluminium is essentially a manufacturing process and the Chinese absolutely dominate the world aluminium industry, with more smelters in China than in the rest of the world combined However, Chinese production, which had been growing relentlessly for a number of years, in 4Q08 went into reverse and four consecutive mom output declines slashed 25% off output
As our next table shows, yoy Chinese production growth accelerated from 20%
in 2006, to a record 35% in 2007 and courtesy of the cutbacks, a meagre 4% in
2008 Data from the International Aluminium Institute (IAI) for August shows that
in January-August, China produced 7.793mt, down 1.113mt yoy a 12.5% yoy decline
Key, though, is that since the March 2009 production low, China has pushed the button for reactivation and every one of the past five months has seen mom output rises Output rose by 6% mom in August and has risen by 31% since the March 2009 low, representing an annualised 3.2mtpa of new and reactivated production We estimate that China could have a further 2mtpa to bring on-stream over the next 12-18 months
Chinese cutbacks in 2008 reduced output growth to just 4% yoy Alas, cutbacks are already being reversed and strong rebound under way
mt 2002 2003 2004 2005 2006 2007 2008 8M ‘08 8M ‘09 Primary production 4.321 5.547 6.689 7.806 9.349 12.588 13.105 8.906 7.793 Change 0.950 1.226 1.142 1.117 1.543 3.239 0.517 -1.113
Change yoy 28% 28% 21% 17% 20% 35% 4% -12.5%
Source: International Aluminium Institute
Trang 38Source: IAI and RBS
Chinese and North American aluminium output accounts for 50% of world output Alas China has begun capacity reactivation in earnest
1.00 4.00 7.00 10.00 13.00 16.00
Aluminium dominates total LME
warehouse inventory holdings
Source: Bloomberg and RBS
Aluminium restarts have boosted
the alumina price and ratio (lhs %)
Al:alumina ratio Alumina U$/t
Alumina is the feedstock for producing aluminium Chinese aluminium smelter restarts of over 3mtpa have boosted alumina demand Domestic refinery output has not kept pace with the restarts and alumina imports have risen sharply
Customs data shows that ytd Chinese alumina imports are up 14% yoy, with April imports the highest in over two years Accordingly, the alumina price has risen sharply this year From an April ’09 low of US$178/tonne, the spot alumina price has risen over 70% in just five months to US$305/tonne
The chart below shows IAI data for the annualised operating rate for the world’s two key aluminium-producing regions, China and North America It shows the opposed approaches to this consumption crisis, with western aluminium producers needing to make room for the Chinese reactivation
Longer term, though, aluminium production is all about energy, and the higher marginal cost of Chinese energy still makes it likely that its smelting industry will remain at the upper end or wrong end of the cost curve What also cannot be ruled out is an appreciation of the renminbi as the US dollar comes under more intense selling pressure
We forecast that Chinese aluminium output will now contract 7% in 2009 to 12.75mt, rebound by 14% yoy in 2011 and maintain double-digit output growth through to 2013F
Outlook – all hinges on the economic macro
We think that aluminium has now comfortably passed the point of maximum despair in terms of both price and market fundamentals With the price well off its lows and producer reactivations already under way, the focus is now the expected upturn in the world business cycle The list of governments now declaring their economies to be out of technical recession keeps on rising So what are the positives for aluminium that may offset the headwinds?
Metal is tied up in long term warehousing deals – As can be seen from our
sidebar chart, aluminium inventories comprise a substantial 81% of total LME warehouse stocks of metal But what is seen cannot necessarily be obtained In
our note published 25 August, Aluminium inventories – not all they seem, we
warned that a large proportion (60-70%) of LME aluminium inventory was tied up
in long term (3- to 15-month) financing and warehouse deals
Trang 39Source: LME, SHFE and RBS
Quarter-on-quarter moves in LME & SHFE aluminium
inventory Ingresses sharply lower in Q3 09
70
290
965 1080 955
Source: CRU, LME and RBS forecasts
World aluminium supply/demand surplus and deficits, 2003-13F Supply surplus should drop and price rise
-0.800 0.000 0.800 1.600 2.400 3.200
Aluminium market balance (lhs) Spot price (rhs)
Japanese port and IAI stocks at record lows – Japanese port stocks of
aluminium, now at 0.192mt, are around the lowest level on record Further IAI producer inventory ended July at 1.205mt, down a massive 0.471mt from end-
2008 and also the lowest level of stocks since IAI records began in 1973
Aluminium ETF and Rusal Glencore wild cards – Another supportive factor
could be the lock-up deal reported in trade journals that Russian aluminium producer US Rusal has made with Swiss trading house Glencore In June, Glencore agreed to buy 0.800mt of aluminium from the indebted UC Rusal, which was in September augmented by an additional 0.500mt, bringing the total
to 1.30mt of metal, around 3.5% of world production and helping driving up price premiums in Asia as Rusal withdrew deliveries from the market In a neat twist, late September saw the news that Glencore was in discussions with a finance house to create the world’s first physically backed Exchange Traded Fund (ETF)
in aluminium
Pace of inventory build has slowed markedly – In the left-hand chart below,
we show the rate of change in LME and SHFE aluminium inventory build over the past 18 months This has slowed sharply in Q3 09 As the recession deepened and demand slumped, inventory accretion rose very sharply from 0.290mt in Q3
08 to 0.965mt in Q4 08 and a record 1.080mt in Q1 09 Net inventory build over Q3 09 has been just 0.250mt Indeed, something worth noting is that LME registered warehouse stocks of aluminium have until now risen for a notable 18 consecutive months But September is on course to break this period of inexorable accretion, with stocks down 30,000 tonnes mom
As the right-hand chart above shows, we forecast that the world aluminium market will remain in surplus for two more years, bringing the total to five consecutive years of net supply build This will bring the cumulative supply surplus between 2007 and 2011 to 6.80mt
Crucially, we expect demand growth to rapidly diminish the scale of supply surpluses post 2009 It is likely that the financial community will be encouraged
by the rollover in reported inventory, boosting the price Certainly post 2011 as supply shortfalls re-emerge, pricing tension is forecast to return with alacrity
In the charts below we have shown Exchange stocks of aluminium in absolute terms but also total reported stocks (Exchange plus producer, port etc)
Trang 40Source: LME, SHFE and RBS
Total Exchange stocks of aluminium at record highs
But watch them come down when demand accelerates
Total aluminium inventory on Metal Exchanges(lhs)
LME monthly average spot aluminium (rhs)
Source: IAI, WBMS, LME, SHFE and RBS
Aluminium stock:consumption ratio vs real price We forecast stock ratio will start declining post 2009
0 2 4 6 8 10 12 14 16 18
1988 1992 1996 2000 2005 2009F 2013F
1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500
Stock:consumption ratio - weeks Real Prices US$/t (rhs)
expressed in terms of a stock:consumption ratio We forecast total reported inventories at end-2009 will reach 6.50mt, equivalent to 19% of 2009 world consumption By 2013F, we think that inventory will have been eroded to around 12% of world demand Typically, as the right-hand chart below shows, less than five weeks of stock has been a trigger for markedly higher aluminium prices We estimate that by end-2009, the aluminium market will be double this level at 10 weeks the highest stock ratio in 15 years This equates to 6.50mt, thus over 3mt needs to be eroded
Next few months will be crucial to getting the recovery under way
We have left unchanged our long-term aluminium price at US$2,425/tonne (US$1.10/lb) Rising cost pressures from a weaker US dollar have been offset by lower energy and raw material inputs, whilst the inventory overhang and idled capacity will likely defer plans for too many new smelters to come to the drawing board for a while
We have raised our aluminium price profile only slightly since our April
Commodity Companion, by 5-7% for the 2009-11F years Thereafter we have
retained our enthusiasm for the price profile Having averaged 2008 at US$2,570/tonne (US$1.17/lb), our forecast for a 2009 spot price average of US$1,655/tonne (US$0.75/lb) will represent a 36% yoy price decline We expect modest price progression in 2010-11 as the supply surplus is reduced
The real fireworks should begin in 2012, when we expect the first supply deficit
in 5 years to emerge By 2013, we expect a 0.500mt supply shortfall, leading us
to pencil in an aluminium price average more than 70% higher than in 2009 at US$2,875/tonne (US$1.30/lb) The aluminium market is on the mend and has already been able to contend with the reactivation of around 50% of its idled capacity Our outlook stance is near-term neutral, post 2011 bullish